April 17, 2023 [The Sidney] – The war in Ukraine and closure of two more oil refineries have renewed focus on a long-running question: How vulnerable is Australia to the threat of energy disruption?

Dangling from the cable of a giant white crane, a six-tonne steel panel moves slowly through the air.

For passengers on the passing Geelong-to-Melbourne V/Line train, it’s an imposing view as the hefty load looms high above the dirt between Corio station and the Geelong oil refinery, where three cylindrical mega-structures are being rapidly built. Inching higher by the week, soon they will stand nearly 10 storeys tall.

For Dale Cooper, the sight is even more remarkable. As head of Viva Energy’s 65-year-old refinery, witnessing an investment of this size taking shape — the development of new strategic storage tanks to hold an extra 90 million litres of diesel, about a week of Victorian demand — marks an extraordinary turnaround for a plant that had been on the cusp of closure less than three years ago.

“There were challenging times for the refining sector globally, and this part of the business was loss-making,” Cooper recalls.

When COVID-19 hit, lockdowns forced people indoors and kept cars parked in driveways and planes grounded. It wiped out demand for petrol, diesel and jet fuel at a speed and on a scale never seen before.

Australia’s relatively small and old oil refineries — plants that process barrels of crude oil into usable fuel products – were already struggling to compete with much bigger, more efficient refineries in Asia, and in 2020-21, they were finally pushed to breaking point. Two refineries – ExxonMobil’s in Melbourne and BP’s in Perth – were forced to close. Today, just two remain.

“Viva Energy has maintained a commitment to refining here in Geelong,” says Cooper. “That has allowed us to really demonstrate the ‘energy security’ part of our strategy, of which the strategic storage project is a key part.”

The importance of energy security – access to secure and affordable energy sources – has shot to attention in a big way lately. With the shock of the pandemic exposing the fragility of supply chains, Russia’s invasion of Ukraine pushing petrol pump prices above $2.30 a litre, and deepening risks of wider geopolitical instability, countries everywhere are asking themselves, ‘Are we doing enough to protect against the threat of future energy disruptions?’

For Australia, on certain metrics, the answer is an unequivocal ‘no’. As a member of the International Energy Agency, Australia is meant to hold 90 days of liquid fuel stocks, but the last time we did was in 2012. Today we hold 59 days’ worth.

The closures of ExxonMobil’s refinery in Melbourne and BP’s Kwinana plant in Perth have slashed Australia’s onshore production capacity further still and left us all the more reliant on fuel imports, which account for about 90 per cent of our needs.

As for any meaningful moves to reduce dependence on volatile foreign fossil fuel markets by driving the switch to electric vehicles, Australia’s uptake of battery-powered cars is among the slowest in the developed world, and only recently has it begun to gather speed.

In light of the worsening risks, energy security has returned to the list of Australian political priorities. In 2021, the federal government struck an emergency package to rescue Viva’s Geelong refinery and Ampol’s Lytton plant in Brisbane, including a 1.8¢-a-litre payment for locally made fuel on the condition that they committed to staying open until at least 2027. It also included grants of as much as $125 million to upgrade their refineries to meet new fuel sulphur limits.

Then in November last year, the Albanese government implemented new rules lifting Australia’s minimum stock levels for traditional transport fuels to protect motorists and businesses from future market turmoil.

The new obligations require refineries and major importers of refined fuel to hold baseline stocks of 24 days of petrol, 20 days of diesel and 24 days of jet fuel from July this year, increasing from 2024.

“Energy security has taken centre stage again, which means measures to assure fuel supply are ever more important,” says Roberto Aguilera, an energy economist at Curtin University.

Still, such interventions will translate to just a slight overall boost to Australia’s ability to satisfy its own energy requirements – and opinions differ over how much this is actually needed. The new stockholding requirements only translate to a short period of added self-sufficiency, and the need to retain onshore refining is debatable. Australia’s refineries process some crude oil from the Bass Strait, but most has to be shipped from elsewhere in the world anyway, so why not import all fuels? To some extent, says Aguilera, the moves are probably more political than anything else – to provide peace of mind to the public and to safeguard hundreds of blue-collar refining jobs that would otherwise be lost.

‘Energy security has taken centre stage again, which means measures to assure fuel supply are ever more important.’

“Overall I don’t think Australia is at a major risk of fuel supply disruptions because we are close to the Asian refining hubs which have been reliable suppliers,” he says.

“For Australia, there are other measures to be taken to ensure our fuel needs are met – for example, the continuous cultivation of relationships with our partners abroad, including in important refining countries like Singapore.”

Others, however, insist nothing should be taken for granted and every bit helps. For its part, Viva says having additional storage capacity will be important and make Australia more resilient to the threat of disruptions, especially when it comes to diesel – the transport fuel deemed the “least-discretionary” because of its use in defence, emergency services, agriculture and mining. The three new diesel tanks under construction at Geelong would alone hold about a week’s supply of diesel for Victoria if there were none being produced.

Says Cooper: “Think of it like a big shock-absorber – any sort of weather delays or plant reliability issues or big fluctuations in market requirements, then you’ve got that capability to respond in a more timely manner.

“When 2024 gets here and we’ve got those tanks available to us, it will make the overall supply chain more reliable.”

Beyond fuel security, keeping Australia’s last two refineries open has proved financially beneficial for their owners, Ampol and Viva, which did not end up needing government subsidies last year because their margins did not fall below an agreed level.

After barely being able to eke out a return when fuel demand collapsed in 2020 and battered profitability across the sector, the fortunes of local refineries have taken a dramatic turn as embargoes on Russian oil products have sent international fuel prices and profit margins soaring.

Viva Energy’s Geelong refining margin – the difference between the cost of crude oil and the value of the fuel products it’s turned into – was halved to just $US2.70 a barrel in 2020, but this year hovers around $US17.

Adam Martin, an oil and gas analyst with E&P Financial, believes refining could “surprise to the upside” over the medium term as an under-investment in new refineries collides with an accelerating recovery in global mobility.

“Russian sanctions in Europe may also impact the flow of refined products,” he told clients in a recent note.

When this decade comes to a close, though, it’s difficult to know what the market will look like. Geopolitical conflict may well have eased and demand may have slowed as the electric vehicle revolution continues displacing petrol. Even if fuel prices were to remain strong, Australia’s two remaining refineries are still expected to face intense pressure from competition with Asia’s mega-refineries that can export to Australia at a relatively low cost.

“It will still be difficult for these refineries to compete even before the end of the decade without this continuous government support,” says Aguilera.

“It’s likely that it will have to be renewed, or these refineries may not go on at all.”

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